German bunds perform best at auctions this year in contrast for declining demand for US Treasuries

Today witnessed an auction for ten-year German bunds, which performed remarkably well.

It recorded a coverage ratio of 2.3 with an average yield of 2.31%, according to data from the financial services company Deutsche Finanzagentur.

While the coverage ratio was the highest since the November auction of last year, and it is higher than the average for the year 2023 at 1.75.

This auction comes after a disappointing auction of ten-year US Treasury bonds yesterday, which recorded a coverage ratio of 2.5, the lowest since December, indicating a decline in demand.

This mixed performance of bond auctions coincides with the countdown to the start of the path of interest rate cuts on the both sides of the Atlantic, starting in June, according to the current consensus expectations.

With the signs about the start of lowering rates, this will push bond yields to decline, with the increasing demand to buy outstanding bonds, which enjoy returns that we have not seen and will not see in years. This is what looked like today’s German bund auction, unlike Treasuries.

The yield spreads between US Treasury bonds and Eurozone bonds are in the positive zone, as is the case for most government bonds of advanced economies. With German, the spread is 1.840% and with French 1.390%.

Perhaps this rise in demand for German bunds, for which the market yield is at 2.33%, may be more urgent now with the need of the European Central Bank to start cutting rates soon in light of the continued weak performance of the Eurozone and the contraction of economic activities across most countries in the region, especially the largest ones.

This is also despite the fact that German inflation-adjusted yield is still in the negative territory as well at 0.25% – versus 0.982% for ten-year Treasuries.

On the other hand, the markets seem to believe that the Federal Reserve’s tendency to ease monetary tightening will be slower than its European counterpart, with the acceleration of economic activities and the return of inflation to accelerate again in February.

Also, the record performance recorded by the US stock markets may make bonds less attractive, but this is not the case in Germany, despite the stock market recording its highest historical levels today as well, with the DAX index touching the 18,000 level for the first time.